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Avram Fisher, Founder & Portfolio Manager of Long Cast Advisers, is a former equity analyst at CSFB and BMO covering industrials and business services. He has prior experience in private equity; as a corporate governance analyst; as a writer; reporter and private investigator; and as a lifeguard and busboy (I still clear plates when my kids don't). This blog is an open book of ideas about patient investing and about starting up a small-cap focused RIA. It is part decision-diary, part investment observations and part general musings. Nothing on this blog is a solicitation for business nor a recommendation to buy or sell securities. It is simply a way to organize and share thoughts with an expanding audience of independent, patient and talented small cap investors. www.longcastadvisers.com

Tuesday, June 24, 2014

OLED: my gut says overlooked value but i'm bumping up against my patent competency

Here is a company that has compounded shareholder equity by 95% & 45% annually over the last 3 & 5 years with little debt, little dilution and incremental EBITDA margins in the 50% range. In short, it has grown its assets materially faster than its liabilities, but the stock has generally traded sideways for the last two years and down from the initial euphoria of "the next big thing". This "next big thing" is a way to generate light and displays - including but not exclusively televisions - more efficiently and with less power while still improving visibility.
The company is universal display and the ticker is OLED, which stands for organic light emitting diode

The company does not manufacture but merely develops and licenses new technology related to this "next big thing." "We generate revenues primarily by licensing our OLED technologies and selling our proprietary OLED materials to display and lighting product manufacturers."
So this is an opportunity to own intellectual capital of the "next big thing" with little required incremental capital. An R&D play of sorts. In theory at least; shareholders have not been rewarded of late as high hopes seem to have long ago given way to a more cautious and even a negative outlook; shares short represent 30% of the float. 
The caution and fear is the residue of a few things, primarily ...

- revenue concentration. Samsung Display represents 60% of revenues under a technology license that expires in 2017
- manufacturing problems. said client is having difficulty manufacturing large panels using the technology and is therefore
- market lag. LG, which is using a different technology for its OLED televisions, has been quicker to get to market than Universal Display technology users.
- fear of obsoleseence. it would be a severe headwind to the company and its value if they are not on the cutting edge of "the next big thing" with a marketable and producable technology.

... On the face of it, I suggest that too much emphasis is placed on the success or failures of the television panel business - the failure of which has been well reported - but overlooks opportunities for solid state general lighting. case in point, the general lighting market for example is estimated by McKinsey at ~$70B poised to grow to $100B in 2020. backlighting is a fraction of this.

http://www.ledsmagazine.com/articles/2011/08/mckinsey-releases-lighting-market-report.html

as I've dug a little into this, I'm faced with a problem of capital allocation. In this case, the capital is my time and the problem, for me, is a lack of resources:

- I don't know enough about the patent market to understand who owns what patents and what they're worth

- The opportunity cost of learning the patent is high. I think I can generate better bang for my buck sticking to my knitting at the moment

- I'm not a physicist. I'm sure I can find articles that would explain some of the technology and the probable outcomes, but it would take a long time to really understand this.

... in short, I'm bumping up against the edge of my competency, and I don't like to invest there.

So while my gut tells me the market is overly bearish on single items like the Samsung manufacturing issues and overlooking potential long term value in lighting, I need to take a pass.

Where the rubber meets the road in this business is where fundamental due diligence and analysis can test the gut's hypothesis. without this capability, I have to leave this discussion on hold for another day.

-END-


What is in current assets? what is up with the Plextronics convertible note? how do they value their patents? 


Licenses: We have licensed our OLED technologies and patents to several manufacturers for use in commercial products. In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. In 2011, we entered into a new license agreement with SDC for its manufacture of active matrix OLED (AMOLED) display products, which agreement superseded our prior license agreement with SDC. We also have license agreements with Lumiotec, Inc. (Lumiotec), Pioneer Corporation (Pioneer) and Kaneka Corporation (Kaneka) for the manufacture of OLED lighting products, as well as a collaborative arrangement with Moser Baer Technologies, Inc. (Moser Baer) to support its development and manufacture of OLED lighting products. Additionally, we have license agreements with Showa Denko K.K. (Showa Denko) for its manufacture of OLED lighting products by solution processing methods (2009), Konica Minolta Holdings, Inc. (Konica Minolta) for its manufacture of OLED lighting products (2008) and DuPont Displays for its manufacture of solution-processed OLED display products using proprietary OLED materials obtained through us (2002).

LG seems to use another technology: May 13, 2013 (Herndon, VA) – Global OLED Technology LLC (“GOT”) and LG Display Co.Ltd. (“LGD”) have signed a patent licensing agreement that gives LGD access to GOT’s patent portfolio, including intellectual property related to Active Matrix Organic Light Emitting Diode (“AMOLED”) display technology.

PPG appears to be a contract manufacturer: PPG Industries currently manufactures our proprietary emitter materials for us, which we then qualify and resell to OLED product manufacturers. We record revenues based on our sales of these materials to OLED product manufacturers. This allows us to maintain close technical and business relationships with the OLED product manufacturers purchasing our proprietary materials, which in turn further supports our technology licensing business. >> results in low capital overhead 

PPG has been a great stock; what's driving it? 

PPG 2013 annual report: "Opened a world-class organic light-emitting diode (OLED) materials production facility at PPG’s Barberton, Ohio, plant, expanding production capabilities for Universal Display’s Universal PHOLED® materials."

Press release regarding the opening of the facility 
http://www.ppg.com/en/newsroom/news/Pages/20131122A.aspx

Crains Ohio on the $9M plant expansion and incremental 10 employees (Nov '13)
http://www.crainscleveland.com/article/20131122/FREE/131129909/ppg-industries-invests-9-million-in-barberton-plant-expansion

customer concentration: We receive a majority of our revenues from customers that are domiciled outside of the United States, and our business is heavily dependent on our relationships with these customers. In particular, one of our key customers located in the Asia-Pacific region, SDC, accounted for more than 60% of our consolidated revenues for 2013. Substantially all revenue derived from our customers is denominated in U.S. dollars.[SDC = In July 2012, Samsung Mobile Display Co. Ltd. (SMD) merged with Samsung Display Co., Ltd. (SDC). Following the merger, all agreements between us and SMD were assigned to SDC, and SDC is obligated to honor all pre-existing agreements made between us and SMD. ]


SDC represetns 60% of revenues but ... 
SDC
We have been working with SDC and providing our next generation PHOLED materials to SDC for evaluation since 2001. In 2011, we entered into a patent license agreement with SDC for its manufacture and sale of AMOLED display products which has a term that extends through December 31, 2017. We also supply our proprietary PHOLED materials to SDC for its use in manufacturing licensed products. Under a separate supplemental agreement, SDC has agreed to purchase a minimum amount of phosphorescent emitter material from us for the manufacture of licensed products. This minimum purchase commitment is subject to SDC’s requirements for phosphorescent emitter materials and our ability to meet these requirements over the term of the supplemental agreement, which is concurrent with the term of the license agreement.



PHOLED = phosphorescent OLED
FOLED = flexible OLED

types of manufacturing: UniversalP2OLED® Printable Phosphorescent OLEDs
The standard approach for manufacturing a small molecule OLED, including a PHOLED, is based on a vacuum thermal evaporation, or VTE, process. With a VTE process, the thin layers of organic material in an OLED are deposited in a high-vacuum environment. An alternate approach for manufacturing a small molecule OLED involves solution processing of the various organic materials in an OLED using techniques such as spin coating or inkjet printing onto the substrate. Solution-processing methods, and inkjet printing in particular, have the potential to be lower cost approaches to OLED manufacturing and scalable to large area displays. For several years, we worked on P2OLEDs under joint development agreements with Seiko Epson Corporation. We are continuing to develop novel P2OLED materials and device architectures for evaluation by OLED manufacturers, and to collaborate with other material manufacturers who are working on host, and other OLED materials, to match our P2OLED emitters.
OVJP® Organic Vapor Jet Printing
OLEDs can be manufactured using other processes as well, including OVJP. As a direct printing technique, OVJP technology has the potential to offer high deposition rates for any size or shaped OLED. In addition, OVJP technology reduces OLED material waste associated with use of a shadow mask (i.e., the waste of material that deposits on the shadow mask itself when fabricating an OLED). By comparison to inkjet printing, an OVJP process does not use solvents and therefore the OLED materials utilized are not limited by their viscosity or solvent solubility. OVJP also avoids generation of solvent wastes and eliminates the additional step of removing residual solvent from the OLED device. We have installed a prototype OVJP tool at our Ewing, New Jersey facility, and we continue to collaborate on OVJP technology development with Professor Forrest of Michigan.
OVPD® Organic Vapor Phase Deposition
Another approach for manufacturing a small molecule OLED is based on OVPD. The OVPD process utilizes a carrier gas, such as nitrogen, in a hot walled reactor in a low pressure environment to deposit the layers of organic material in an OLED. The OVPD process may offer advantages over the VTE process or solution processing methods through more efficient materials utilization and enhanced deposition control. We have licensed Aixtron AG, a leading manufacturer of metal-organic chemical vapor deposition equipment, to develop and qualify equipment for the fabrication of OLED displays utilizing the OVPD process.
TOLED Transparent OLEDs
We have developed a technology for the fabrication of OLEDs that have transparent cathodes. Conventional OLEDs use a reflective metal cathode and a transparent anode. In contrast, TOLEDs use a transparent cathode and either a transparent, reflective or opaque metal anode. TOLEDs utilizing transparent cathodes and reflective metal anodes are known as “top-emission” OLEDs. In a “top-emission” AMOLED, light is emitted without having to travel through much of the device electronics where a significant portion of the usable light is lost. This results in OLED displays having image qualities and lifetimes superior to those of conventional AMOLEDs. TOLEDs utilizing transparent cathodes and transparent anodes may also be useful in novel flat panel display applications requiring semi-transparency or transparency, such as graphical displays in automotive windshields.

Tuesday, June 17, 2014

ESWW: Financial information to follow up my prior post

I previously wrote about Environmental Services Worldwide. To summarize the attributes that make it appropriate for a patient investor ... 

very small share count, just 125,000 shares outstanding 
very small market cap, less than $10M depending on bid / ask 
strong balance sheet, about 1/3rd of the market cap is net cash 
low valuation, less 1x EV / EBITDA
growing sales / EBITDA / margins 
a real industrial business, manufacturing diesel particulate filters with verification from California Air Resources Board 
shareholders and board dominated by sophisticated institutional investors from Apollo Group (the PE) and Apollo Investment Management (the BDC)

I don't want to overlook the real risk of dilution here; the company's outstanding debt plus recent subscription rights plan can convert to an additional 153,000 shares of stock valued at up to $80 / share when it comes due in 2018. This would essentially double the share count. But even assuming full dilution, and the resulting doubling of valuation, it still remains attractive. Furthermore, since the conversion price maxes out at $80 / share, buying below that aligns shareholders with debtholders interests. 

Here are the company's quarterly financials, courtesy of FactSet: 


Monday, June 16, 2014

my urge to vomit when i watch CNBC

listen to any radio station and every 10-15 minutes you'll hear "the market/S&P/Dow/futures are up/down/flat today." watch TV and the so called '"business news" will report the same. CNBC and Bloomberg were created to track every moment of the market day.

But reporting every 15 minutes on the Dow is as useful for understanding the economy as reporting net deaths and births every 15 minutes is useful for its picture of our population. it's just a lot of noise.

how is it that the direction of an arbitrary and curated market index like the dow or S&P has become such an overwhelming part of our daily conversation?

how is it that this has all become so pervasive yet remains so meaningless? i understand the media's need for soundbites, but so many datapoints can be packaged that are more relevant indicators to the economy ...

- weekly gasoline supplied
- monthly vehicle miles traveled
- average weekly price per click
- weekly rail traffic
- volume or breadth of the market
- number or percentage of stocks hitting new 52-week highs / lows

... the list can be quite creative and endless.

from the media's perspective "the market" is a great way to engage our fear or elation, which sells ads, but there's a harm with equating the market with the economy. people actually mistake one with the other.

when daily changes in the dow or S&P are equated with the economy people can never appreciate the important and occasionally complex issues that impact their jobs, their companies and their household budgets.

as a patient investor, my concern with the market is only relevant for the opportunities it creates to acquire portions of business at a discount to their underlying values. but it should worry everyone with an interest in the long term health of the country that we perpetuate ignorance every 15 minutes of the day.

Thursday, June 12, 2014

ESWW: A $7M Mkt Co Trading at 1x EBITDA Substantially Growing Revs and EBITDA

On a dreary overcast day in NY, there's nothing like a new stock idea to get me excited. Found this company ...

http://finance.yahoo.com/q?s=esww

... while running a screen for small cap companies growing revenues and margins and with net cash representing a significant portion of MktCap.

Environmental Solutions Worldwide (ticker ESWW) makes emissions control retrofits for medium and heavy duty diesel (MHDD) trucks, both on and off-road.

The overall market for on/off road trucks benefits from increased pollution control regulations by state and federal EPA. The trend towards increased pollution control regulations are well documented here ...

http://www.arb.ca.gov/msprog/mailouts/msc1325/msc1325.pdf
http://www.dieselnet.com/news/2013/08meca.php
http://www.dieselnet.com/standards/us/ld_t3.php

The company has a market cap of roughly $7M.
In 2013 it did $17.5M in sales and was breakeven.
In 1Q14 it did $7M in sales and $1.9M in EBITDA.

It trades at 0.3x annual sales, 1x EBITDA and has a pedigreed board of directors including what appears to be two of Leon Black's kids. Unless he's Cronos-like who ate his children, why would he saddle his kids with a crappy company?

The Apollo connection isn't just in the board of directors but how the company operates. Much of the growth in sales corresponds to its "stalking horse" acquisition of Cleaire out of bankruptcy auction in 2013 for $1.4M.

There are only 125,000 shares outstanding (yes, thousand) and the company is authorized to issue up to 250M, which simply reflects the recent 1:2,000 reverse stock split and re-listing without terminating shares.

Also, the bulk of the $2.5M in l/t debt is in the form of convertible notes that would be dilutive. But the opportunities I see in buying a profitable cash flow positive company in a regulated growth market offsets my fears of dilution to shareholders, especially since it seems at least that everyone's goals are aligned towards long term growth and profitability.

I haven't nearly done as much work on this as a normally do and I will write more on this later, but the world cup is starting and I need to prepare dinner for my staving kids. Such are the travails of the outofworkanalyst.

Disclosure: I own 200 shares that I acquired today.